Monday, March 28, 2016

While major private equity founders complained about their undervalued stock prices one of their brethren ripped off sophisticated investors for nearly $100 million. ZeroHedgereported:

"a highly reputable executive with a just as
reputable private equity firm was arrested and charged with securities
fraud. Andrew Caspersen, a Harvard Law School graduate and a partner
at the Park Hill Group, an advisory firm that up until last fall had
been a part of the Blackstone Group, was accused of defrauding numerous institutional investors out of $95 million through fake private equity investments.

Private equity is overly image conscious. In the case of Andrew Caspersen there was no substance behind the image. He wagered his ill begotten gains, losing them in options trading.

An ADNsearch on Pt Capital produced thirteen articles in addition to the investment brochure The most recent piece from November 2015 promoted Pt Capital's first PEU fund offering:

Pt Capital, an
Anchorage-based private equity firm investing exclusively in four Arctic
countries, announced this week that it attracted more than $125
million to its inaugural fund.

Pt Arctic Fund I requires a minimum investment of
$10 million and promises a compounded annual return of at least 20
percent, according to its brochure, filed in November with the U.S. Securities and Exchange Commission.

The fund is bullish on the idea that a warming Arctic will eventually open up a wealth of development opportunities in the oil, gas and shipping sectors in the next two to three decades.

Rogoff's ADN and Pt Capital held an Arctic Circle Summit on Alaskan Shipping and Ports the week before President Obama dined at Alice Rogoff's home.

The purpose
of the meeting was to build partnerships to develop safe and reliable
shipping through the Alaskan Arctic. These partnerships will be
necessary to finance needed ports of refuge, search and rescue
equipment, transshipment facilities and icebreakers.

I want to take one quick thank you to our sponsors.... Last but not least I want to say a quick word about Pt Capital... For those of you who don't know Pt Capital is a brand new private equity firm in Alaska. Well, I'm not sure what brand new means, but new on the scene and they are really borne out of our Arctic conferences. It's one of the most tangible things that we've done. We'll have boots on the ground in the Arctic. They're dedicated to Alaska and the Arctic. It's where their investment dollars will go.

Rogoff is Senior Advisor and part owner of Pt Capital via her founders' stock. She owns the Alaskan Dispatch News, the largest newspaper in Alaska. Rogoff shamelessly promoted both as the eyes of the world turned to Alaska and President Obama's visit.

Today's synergistic business world is likely the death knell of investigative journalism. Alaska could be a role model for the country in this light.

Monday, March 21, 2016

Alice Rogoff, the wife of Carlyle Group co-founder David Rubenstein, said her news organization is in "investment mode." She wrote:

At Alaska Dispatch News – the company – we have
a split identity. Of course, first and foremost, we are a news
organization. But we’re also a living, breathing small business (or
medium size, really, given our 200-plus employees).

This is an update about the state of our business, and some thoughts about our future.

Rogoff committed to producing a physical newspaper for fifteen years. Alaskans will have news they can touch and feel. Otherwise ADN sounds like an advertising driven organization.

As most of you appreciate, as a business, what
we “sell” is not just news but advertising and marketing tools for you
to reach our readers. And as our industry evolves, we are growing to
offer a more complicated and nuanced set of products.

Some
even reach beyond the bounds of our own website and print publications.
For example, readers and advertisers alike have been enjoying the
sponsored giveaways hosted on our social media accounts. We are also
helping our Alaska advertisers take their messages beyond adn.com by
offering “programmatic” ad campaigns on the web managed in real time by
our own in-house ad staff.

You may also have noticed what we call “Sponsored Content”
on our site. These stories have traveled the history of the Iditarod
Trail and explored the culinary delights of Alaska-grown seafood and
produce. They have celebrated the Teachers of Excellence, sponsored by
BP.

That's the same BP that brought Americans the 2011 Gulf Oil Spew (which killed eleven people), the 2005 Texas City Refinery explosion (that killed fifteen and injured 180 people) and three Alaska pipeline spills, two in 2006 and the other in 2009. It's the BP that gave CEO Bob Dudley a 20% increase in executive pay for sacking 7,000 jobs and getting BP the biggest financial loss in the company's sordid history.

Oddly, in August 2007 BP CEO Lord John Browne left to join Riverstone Holdings, a joint venture partner with The Carlyle Group. Which brings us back to Mrs. Rubenstein's Alaska newspaper that partners with BP on Sponsored Content. ADN's future includes:

We’re always looking for the next great idea for a
product that provides great content to our readers and maximum exposure
to Alaska businesses.

I don't believe the ADN has a split identity at all. It's a tool for development, both energy and economic. The future is profits. That means not digging to find private equity bribes to access public pension funds. The Carlyle Group and Riverstone paid a combined $70 million to make a New York pension fund investigation go away.

The Carlyle Group started after David Rubenstein and his partner earned tens of millions in fees from selling Alaskan Native tax losses to corporations. The New Yorker reported:

The episode became known in Washington business lore as the Great Eskimo Tax Scam

I'm afraid Alaskan investment is for the taking and Rogoff's newspaper will not act as a public counterbalance, much less an investigative entity. Alaskans themselves will need to be wary of who is behind what and why. Greed is the norm in today's investment world.

ADN, the largest daily newspaper in Alaska, is in investment mode. So is Alice Rogoff's Pt Capital, an Alaska based private equity underwriter. ADN missed their intersection in the past. And that points to another aspect of Rogoff's ADN future.

Banks are increasingly turning down companies seeking financing to
pay for debt-laden takeovers after the recent market rout left them
saddled with debt from earlier deals.

Credit Suisse Group AG,
Jefferies Group LLC and Wells Fargo & Co. are among the firms
turning down new requests for financing—typically from low-rated
companies—as they retreat from the lucrative butrisky business of
backing debt-heavy buyouts, people familiar with the matter say.

They highlighted banks balking over Carlyle Group's Veritas buyout:

In November, a group including Bank of America Corp., Morgan Stanley, UBS Group AG and Jefferies struggled to sell about $5 billion of loans and bonds they had guaranteed for Carlyle Group LP’s $8 billion buyout of Symantec Corp.’s Veritas data-storage unit, according to people familiar with the matter. Investors balked at buying the debt after Veritas reported a sharp decline in quarterly earnings, the people said.

Carlyle ultimately renegotiated the deal in January at a price about $1 billion lower. Even so, the banks have yet to sell the loans and would face a loss of at least $250 million if they tried to unload the debt in current market conditions, bankers say.

The market for buying and selling companies cycles based on corporate valuations and deal financing. Investors are smacking down junk this NCAA basketball tournament season. Ironically the East final will be played in the Wells Fargo Center.

Sunday, March 20, 2016

“The Commercial Energy Working Group is one of the most active – and
secret – organizations seeking to undermine energy market regulations,”
Slocum told The Intercept. “The purpose of my complaint is to force the group to start identifying its membership.”

Under the Honest Leadership and Open Government Act of 2007, all
lobbying organizations registered with the federal government must list
the names of any business that has contributed more than $5,000 to them
in any one quarter. But the CEWG “does not disclose the individual
companies or entities that constitute its active membership,” according
to Slocum’s letter.

The group filed its first lobbying disclosure in 2013 However the Working Group of Commercial Energy Firms has been influencing public policy since 2010. The group wrote the Secretary of the Commodities Futures Trading Commission a number of times to influence swaps regulation under Dodd-Frank:

Lawyer Alexander Holtan migrated from Hunton Williams to Sutherland, Asbill Brennan in 2013. That's when the group changed names and began filing lobbying reports.

During the 2nd quarter 2015 the Commercial Energy Working Group spent $60,000 lobbying on the following issues:

The U.S. Commodity Futures Trading Commission reauthorization;
regulation of derivatives; treatment of derivatives and physical
commodities in bankruptcy; and H.R. 2289, the Commodity End-User Relief
Act.

Bets on energy commodities are far from TV, movie or music territory. But there may be a good story in this mess. Vitol, a member of the Commercial Energy Working Group by attendance at meetings with the CFTC, recently did a joint venture deal with The Carlyle Group on Varo Energy.

“His vision was to combine capital with politically connected people whose phone calls are accepted around the world."

Carlyle co-founder David Rubenstein hosted Vice President Joe Biden on Thanksgiving and dined numerous times with President Obama, as did Rubenstein's wife Alice Rogoff during Obama's Alaska trip.

Seeking Alpha reported Carlyle and Vitol were the first exporters of U.S. oil to Europe. Together Carlyle and Vitol have an insider on the Commodity Futures Trading Commission, Vitol's Ron Oppenheimer. Besides being a regulator Oppenheimer is part of the secretive Commercial Energy Working Group.

Welcome to the Government-Corporate Monstrosity, Eisenhower's Military-Industrial Complex on trillions in federal steroids.

Two subsidiaries of Farmington-based United Technologies Corp.
are shutting heating and ventilating parts manufacturing plants in
Indiana, eliminating more than 2,000 jobs as operations move to Mexico.

Carrier,
a manufacturer of heating, ventilating, air conditioning and
refrigeration, said it will relocate its Indianapolis manufacturing
operations to a site near its manufacturing plants in Monterrey, Mexico,
over three years beginning in 2017.

United Technologies CEO Gregory Hayes garnered an individual performance highlight for 2015. The board praised him for his:

Rigorous commitment to
a disciplined capital allocation strategy, evidenced by the $12
billion we returned to shareowners in 2015 through dividends and
share repurchases (including the $6 billion accelerated share
buyback program announced in November 2015)

Hayes' disciplined capital allocation strategy earned him over $10.7 million in executive compensation for 2015. That's significant capital allocated to his personal pocketbook at the expense of other company workers.

Hayes' accelerated stock buyback program will reduce public float and increase UTX's earnings per share numbers, which factor into Hayes' executive incentive pay via his bonus and performance share units (PSU), which comprise 79% of his annual compensation:

The 2015 EPS results of $8.61 per share included discontinued
operations and the gain realized from the sale of Sikorsky Aircraft. The
Committee excluded discontinued operations from EPS, which
includes this gain, for PSU vesting measurement purposes. This resulted
in an EPS from continuing operations of $4.53. The Committee
made additional adjustments to exclude restructuring, non-recurring, and
other significant, defined items unrelated to operational
performance (see Appendix B on page 86 for details), resulting in an
adjusted EPS of $6.30 and a vesting factor of 88%.

Move 2,100 jobs to Mexico at $3 an hour and how much might CEO Hayes earn in performance share units? The global race to the bottom only applies to worker pay and benefits. Executives stack each others' boards and dole out a plethora of high priced goodies. In the case of UTX perks include an executive physical, leased car and $16,000 for financial planning.

Thursday, March 17, 2016

Recent stories showed the Obama administrations letting insiders and corporations off the hook. The first dealt with the Department of "Just Us": Fortunereported:

In late 2010, in the waning months of the Financial Crisis Inquiry
Commission, the panel responsible for determining who and what caused
the financial meltdown that lead to the worst recession in decades voted
to refer Robert Rubin to the Department of Justice for investigation.
The panel stated it believed Rubin, a former U.S. Treasury Secretary who
has held top roles at Goldman Sachs
and later Citigroup “may have violated the laws of the United States in relation
to the financial crisis.” Rubin, the commission alleged, along with
some other members of Citi’s top management, may have been “culpable”
for misleading Citi’s investors and the market by hiding the extent of
the bank’s subprime exposure, stating at one point that it was 76% lower
than what it actually was.

No government action was ever brought against Rubin. And there is no
evidence that Department of Justice acted on the crisis commission’s
recommendations.

The Obama administration knows how to hide the extent of a disaster, financial or natural. OMB Chief Peter Orszag, who later landed an executive position with Citigroup, minimized the extent of the BP Oil Spew in the Gulf of Mexico.

Large U.S. corporations had a good tax-filing season in 2015. Firms with
at least $10 million in assets faced the lowest IRS audit rates in at
least a decade as the tax agency coped with staffing declines, new data
show.

Another way to avoid scrutiny and accountability is to coopt the regulator or better yet, self regulation.

Wall Street’s top lobbying group wants a closer relationship with the policy makers that oversee its member firms.

John Rogers, chairman of the Securities Industry and Financial Markets Association and a top official at Goldman Sachs Group Inc., on Tuesday called for a standing body made up of bankers and regulators to discuss developments in policy, examination and enforcement. A key responsibility for the panel would also involve regularly providing guidance on postcrisis rules and other issues to financial firms.

Even those caught red handed only pay a temporary price, as evidenced by the SEC's approving Steven Rattner's fee income deal with Guggenheim. Bloombergreported:

The former head of Quadrangle Group, Rattner has faced limits on his financial activities after the 2010 resolution of an SEC probe into kickbacks in connection with a New York state pension fund.

Tuesday, March 15, 2016

Three days before Allergan Plc announced a $160 billion deal with
Pfizer Inc. last year, its board sent a message of reassurance to its
executive team: if you’re let go after the acquisition closes, we’ll
cover the tax bill for your severance packages.

As a result,
Allergan could end up reimbursing its five top managers as much as $86
million for taxes they’d have to pay on top of ordinary income taxes if
they aren’t offered jobs in the combined company.

The tax reimbursements would come on top of exit packages worth a combined $300 million for the five executives if they were let go.

Allergans top brass had this to say about employees in their Q1 2015 earnings call:

I am so proud of each of the people on our combined global team. One
thing is clear: this combined team rallies quickly around surprising
opportunities, focuses on the key objectives and executes flawlessly.
When it comes to execution, we are like a finely tuned, high-performance
engine.

I would just, again, close with saying that this team has continued to take bold and decisive action to create value.

The "value" employees created will accrue to top executives in an inordinate manner by the board's action. Top executives are in a class by themselves, distinguished by greed.

All things considered, it’s hard to avoid seeing the merger proposal as a
cynical move designed to boost Pfizer’s stock price and generate a
windfall for the company’s senior managers, who are compensated mainly
in equity.

At the JP Morgan Healthcare Conference on 1-12-2016 top brass said the deal was about growth and efficient capital allocation around the globe. Allergan's tax bill alleviating separation deal efficiently allocates millions in capital to executives no longer employed after the merger. But alleviating taxes is the basis for the deal. Companies and executives hate paying taxes. Only the little people pay in our PEU world.

Monday, March 14, 2016

Lord John Browne of Madingley, the Don Blankenship of oil refining, spoke to NPR about corporate social responsibility last week. BP's Texas City refinery blew up eleven years ago resulting in 15 deaths and injured 170 more. Browne's deposition came after his resignation as BP's President. He denies knowledge of operations changes from corporate executive edicts that contributed to the disaster. Someone truly socially responsible would've accepted responsibility. but Browne already moved on to his next big money gig.

His 2008 deposition stated:

Q. (BY MR. COON) Mr. Browne, you indicated that your present employment is with Riverstone Holdings?A. That's correct.Q. Is that your primary position at this time, sir?A. It is.Q. And that is a holding company that is associated with The Carlyle Group, is it not, sir?A. Carlyle is a shareholder in the company.Q. Do you know something about the shareholders in The Carlyle Group, sir, that you work for?A. Well, we don't work for The Carlyle Group. The Carlyle Group is a shareholder in Riverstone Holdings, L.L.C., and I am the managing partner of Riverstone Holdings, L.L.P., which is owned by the L.L.C.Q. Yes, sir. And if you go to the Carlyle website, you can see the list of their locations around the world; and one of them that they, interestingly, list is Riverstone. Do you know why that would be?A. I don't know. I haven't seen their website.Q. Okay. Do you know some of the shareholders in The Carlyle Group, sir?A. I know the -- I met, several times, the founders, Mr. Dan D'Aniello, Mr. David Rubenstein and Mr. Bill Conway.

Lord John Browne and Carlyle's David Rubenstein have deep political connections. They've each used their contacts to enrich themselves handsomely as private equity underwriters. PEUs preferred tax status is a social cancer that this pair enjoyed while their businesses failed employees and customers. The Carlyle Group's LifeCare Hospitals had 26 deaths in the aftermath of Hurricane Katrina in August 2005.

How much has Lord John Browne and David Rubenstein saved in preferred taxation from 2005 until now? That's a question an alert media, who understands the deeper relationships between politicians and the PEU boys, might ask.

Thursday, March 10, 2016

A few years ago Rubenstein signed a contract with HarperCollins for a
book called “Beyond Wall Street: Inside The Rise Of Private Equity.” It
was listed in all the HarperCollins catalogs and due for publication in
2009. Well, calendar pages flew by, and the most recent date scheduled
was for December 2015. But that date came and went. Now I’m told that
Rubenstein has pulled the book, even though it was written, edited, and
ready to be sold.

Google Books promoted Rubenstein's book with:

A founder of the Carlyle Group explains how a rise in private equity is
changing the future of investing, in a guide that covers how private
equity works, the inner functions of private equity firms, and how
everyday investors can make significant returns.

Book Depository.com hawked the book with:

Rubenstein offers the first look at an industry that touches ordinary
investors through pension funds, university and charitable endowments,
and funds that may someday be available to almost anyone who is
attracted to returns that consistently outperform the stock market

I'd like to think PEUReport chronicles the meteoric and frightening rise of private equity underwriters over the last nine years. WSJ just did a piece on a Carlyle fund that echoes these themes.

On June 8, 2010 Rubenstein’s cell phone rang as he was speaking to supporters
of the Economic Club, at the Phillips Collection. He left the stage to
take the call. Among those in the audience was Gary Shapiro, the
consumer-electronics lobbyist who was Rubenstein’s travel companion to
Japan in the ’80s. After a few minutes, Shapiro recalls, Rubenstein
returned and said, “That was a senator. That one call just saved us on
carried interest.”

PEUReport readers know how Presidents George W. Bush and Barack H. Obama curry favor by dining with Mr. Rubenstein and his wife Alice Rogoff. ProPublica also told a number of dinner stories.

It's been a tough decade since the public learned about carried interest and our elected officials sat on their fattened hands. Thank heaven ProPublica noticed what others have. It's a bipartisan world with lots of love for PEUs. Politicians Red and Blue love PEU.

Sunday, March 6, 2016

With the Super Crash on the way, financial stocks are taking a
beating – particularly private equity stocks like Apollo (APO), Ares
(ARES), KKR (KKR), Blackstone (BX), Carlyle (CG), and Fortress (FIG).
The thing all of these companies have in common is heavy exposure to the
high debt levels that built up since the financial crisis. The market
is telling us that it is very worried that the Debt Supercycle is over
and that a lot of this debt isn’t going to be paid back.

Carlyle is off its lows from several weeks ago. Lewitt is concerned about two private equity practices given the huge debt levels corporations. i.e PEU affiliates, have taken on. Private equity firms also package, sell and service corporate debt through collatoralized loan obligations (CLO).

Concerning practice #1 is well know to PEU Report readers., dividend recaps or what I call dividend bleeding.

The first “private equity indicator” I watch for is an increase in the frequency of “dividend deals.”

Also known as a “dividend recapitalization,” this infamous
transaction involves a private equity‐owned firm borrowing money to pay a
dividend distribution to its owners. We’ve seen this behavior all over
the news lately – KKR-backed GenesisCare seeking $285m in loans,
American Tire Distributors acquiring $805m in junk bonds to pay
dividends to TPG Capital, JCrew borrowing $500 million to cash out its
shareholders, and Vogue International LLC borrowing over $200 million to
pay a shareholders’ dividend to The Carlyle Group.

The debt raised in these transactions is not used to enhance the
business of the borrower in any way, for example, by building additional
facilities, funding research and development, creating new products, or
hiring new workers. The money instead is paid out to the private equity
sponsor in order to reduce the capital it originally invested in the
business. It saddles companies with more debt while reducing or
eliminating any skin that the private equity firm has in the game –
leaving bondholders holding the bag.

Practice #2 is monetizing a PEU affiliate via sale to another PEU. Rarely is the price paid revealed in a PEU to PEU deal.

This second practice that indicates that the credit cycle is entering
its terminal stages is the phenomenon of private equity‐owned companies
being sold by one buyout firm to another, which I call “passing the hot
potato.”

This has been happening at a dizzying pace lately – if you’ve been
tracking our failing private equity firms, you’ve seen Ares Management
buying CHG Healthcare Services from J.W. Childs Associates and snapping
up Farrow & Ball from European Capital Limited; KKR selling off TASC
Inc. to Engility Holdings; Blackstone and TPG teaming up to buy
Kensington Group from Investec; and Blackstone selling GCA Services to
Goldman Sachs Group Inc’s private equity arm and Thomas H.Lee Partners
LP.

Selling an affiliate to a peer avoids public disclosure. It enables the repricing of asset values and debt to be reissued. It also enables both PEUs to charge deal fees.

The real reason such deals are done, of course, is to generate fees for
private equity firms. The selling firm is able to generate a
“realization event” that triggers a “transaction” fee and allows it to
return capital to investors, while the buying firm is able to pay itself
a transaction fee on the purchase. The wonder is that lenders continue
to finance such transactions, which are done at higher and higher
multiples of cash flow and contribute little to economic growth.

Carlyle frequently charges a huge fee to make up for losing years of expected PEU management fees.

Private equity firms have mastered the art of enriching themselves at
the expense of virtually everybody else with whom they come into contact
in the economy.

Lewitt believes the credit cycle is nearing a bad end. That would spell trouble for PEUs.

Thursday, March 3, 2016

What began as a promising multimillion-dollar economic venture to
generate hundreds of wind energy-related jobs in San Angelo turned into
an undertaking that blew south.

The city of San Angelo Development Corp. and the city are seeking to
recoup more than $2.7 million in damages, attorneys' fees and minor
costs resulting from a 2009 investment to bring a wind turbine tower
fabrication plant to town.

COSADC and the city hope to recover the money through a summary
judgment hearing scheduled Wednesday in the 119th District Court and
avoid going to trial.

Negotiating with the
private equity hedge fund that today controls Hirschfeld is more challenging than
partnering with local ownership with whom the City has had close personal and working
relationships for decades.

Texas politicians, starting with Governor Rick Perry, trained PEU owners and affiliates that public money was loose and nearly free.

"The City and the COSADC could not agree to a minimal repayment," the
release stated. "Doing so, and allowing Martifer-Hirschfeld to walk away
with millions in taxpayer dollars, would constitute a serious breach of
public trust."

It's hard for Insight Equity to monetize Hirschfeld with a multi-million dollar lawsuit hanging over its head. The City of San Angelo is the first I've come across that cited a PEU owner in suing for economic nonperformance. I hope it becomes a trend.

Insider Architect of the Implosion

"I had a choice. I could be an insider or I could be an outsider. Outsiders can say whatever they want. But people on the inside don’t listen to them. Insiders, however, get lots of access and a chance to push their ideas. People — powerful people — listen to what they have to say. But insiders also understand one unbreakable rule: They don’t criticize other insiders."--Larry Summers, Ph.D.

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When Tim Geithner, the former Treasury secretary, takes over as president of Warburg Pincus, the private-equity firm, even a high-school dropout can discern a pattern.-Another person who noticed